Consolidation of Public Sector Banks in India – Journey Till Date

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Last month, the government proposed the merger of the three state-owned banks- Vijaya Bank, Dena Bank and Bank of Baroda to create country’s third-largest lender.

The plan to merge was taken by a panel led by Mr. Arun Jaitley, Finance Minister. The move came as part of efforts by the government to reduce the ballooning NPAs.

For long it has been observed that it is not profitable for the small public sector banks to compete with each other for a very small pie of customers. This has led to lower returns on the capital employed, competing demands for funds, and growing competition.

The new synergy is expected to have a lower NPA ratio compared to the NPA ratios of 11.04 % for Dena Bank, 5.40 % for Bank of Baroda and 4.10% for Vijaya Bank.

Is this something new?

This is not the first time that the government has announced some sort of merger in the banking sector. Very recently, the Cabinet approved LIC’s proposed acquisition of up to 51% stake in IDBI Bank. This will help IDBI meet its capital needs.

Last year State Bank of India (SBI) had merged with itself five of its subsidiary banks and also took over Bharatiya Mahila Bank bringing almost a quarter of the nation’s outstanding loans in the banking sector on to its books.

However a few people argue that this move will in turn adversely affect the profitability of the amalgamated entity since Dena Bank is in a bad shape with higher NPAs, higher cost to income and falling profitability so Dena Bank’s numbers might pull down some of the profitability numbers just as what happened in the case of SBI. After the merger, SBI incurred losses for the first time in 20 years.

Conclusion

Banking sector reforms have been an important focus of the Modi government to revive credit growth and wipe out the mountain of bad loans that currently weighs down the performance of almost all public sector banks. After the merger, the number of PSU banks will come down to 19 from 21.